three hours with warren buffett - complete cnbc transcript - august 22, 2008

8/6/2019 Three Hours With Warren Buffett - Complete CNBC Transcript - August 22, 2008

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Warren Buffett, Chairman of

Berkshire Hathaway, satdown with Becky Quick atthe Holland Performing Arts

Center in Omaha for an

series of live appearances oCNBCs Squawk Box

program from 6a to 9aEastern Time on Friday,

August 22, 2008.

n

This is the completetranscript, as prepared by

BurrellesLuce.

BECKY QUICK: Good morning, everybody and welcome to SQUAWK BOX right here on CNBC.

This morning we have quite a show in store for you coming up today. As you probably know,

our special guest for the next three hours is a man who needs no introduction. We are talking

about Warren Buffett. And, Warren, good morning. Thank you for joining us this morning.

WARREN BUFFETT (Berkshire Hathaway Chairman & CEO): Yeah, early morning, right.

QUICK: Very early morning. You've only had a couple of complaints about that, right?

BUFFETT: No, I try not to complain too much.

QUICK: Well, good morning. Thank you for joining us today. We have an awful lot to talk

about this morning. Also, this is a worldwide, around-the-world show this morning. From the

world's most famous investor, we're being--going to be going to the world's most celebrated

athletes. Carl, you know, the Summer Games are coming to a close. You've been there

covering the whole thing and what are your feelings as we get to this final end of the entire

Olympic Games?

CARL QUINTANILLA, co-anchor (Beijing): I was just going to say, Becky, this has got to be

the first ever broadcast of split anchor Beijing-Omaha show in the history of television. We've

got a lot going on here. We've had--we've had pretty good success, the Americans winning

gold in soccer, beach volleyball, going for the gold in volleyball. We'll bring you up to speed on

CNBCs Squawk Box Three Hours with

Warren Buffett Transcript Page 1 of 28


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BUFFETT: And the film takes the position pretty universally throughout the film that it's an

enormous problem, and I probably represented the group that thinks this is quite a bit less of

a problem than the film portrayed. But I admire the people that did it in that there's so littlethinking done beyond the next electoral event that there are important policy matters that do

extend way out into the future and--whether it's energy, whether it's the question of weapons

of mass destruction, certainly in terms of fiscal policies. So I admire the fact they tackled the

subject. I don't--I don't agree with many of the conclusions in the movie.

QUICK: But we did have a huge discussion on this last night. And, in fact, we'll be joined by

both Pete Peterson and Dave Walker a little later this morning to talk more about what they

see happening in the economy, and it's something we're going to be talking about throughout

the morning. So again, Warren, we're thrilled to have you here this morning for three hours,

and we do have a lot to talk about today. One of the things we'd like to get straight to,

though, is what you see happening in the economy right now. We've been talking to you for

some time about what you see as some significant problems in the economy. And, from your

perspective, have things gotten any better? Have they gotten any worse?

BUFFETT: No, they've rippled out some, and that's what you'd expect. So the excesses in

credit, the deleveraging that was required, the weak credits that are exposed, all that is--

we're seeing manifestations out as the ripples go out, and I think I said one time that, you

know, you only find out who's been swimming naked when the tide goes out. Well, we found

out that Wall Street has been kind of a nudist beach. There's--it's just one discovery after

another of firms that either didn't know what they were doing or that did things that they

shouldn't have knowingly. And all of the troubles have not been revealed the first time around,

usually, so there's considerable disillusionment that's set in in terms of are these guys telling

us the truth now or maybe they just don't know what the truth is. So all of that's having an

effect, and what we're seeing in business, in our retail businesses...

QUICK: Mm-hmm.

BUFFETT: ...certainly, anything to do with housing is even a further slowing down. I mean,

June and July, both in terms of credit experience with people that first got into trouble of

house payments and now on credit card payments and so on. And retail trade, it's not over by

a long shot.




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QUICK: Does that make you think that things are going to continue to decline over the next,

let's say, six months?

BUFFETT: Oh, I think they could easily go beyond that, yeah.

QUICK: What's your prognosis, or what's your best guess or your best estimate of what...

BUFFETT: You never know. I've said in the past it ought to be longer and deeper, and I think

it is going to be longer and deeper, but no one knows when--what you do know is that it will

turn around. I mean, the country will be doing far better five years from now than it is now,

but it won't be, in my judgment, it probably won't be doing better five months from now.

QUICK: You talk about how this has rippled out and it's affecting the consumer at this point.

Have the credit markets themselves gotten any better?

BUFFETT: Well, the credit markets have had this situation where periodically it's seemed like

they were getting better and then something else comes along. So the bankers feel a little bit

better for a while and then something comes along and then they want to deleverage further.

They find out they've got more trouble. Right now, for example, they're taking back all these

auction rate securities. Well, they don't want to take things out of their balance sheet. So it's

just one more problem for them, and you've seen these waves of problems and sometimes

they create their own momentum. I mean, if the stock prices go down enough of the banks,

then they feel like they can't sell securities. Of course, the extreme example was Freddie Mac

was--has sort of been chasing a rabbit down the hill...

QUICK: Right.

BUFFETT: ...and promised they would raise additional money and of course the price of the

stock got to the point where it became ridiculous. So troubles feed on themselves.

QUICK: Let's talk about Fannie Mae and Freddie Mac, specifically. These are two stocks that it

seems like every time you turn around are touching new low levels. There's a lot of concernout there on the market about these two stocks right now. What's your general take on how

they got here and what you think's going to happen next?

BUFFETT: Well, how they got here was they had two businesses, basically.




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QUICK: Mm-hmm.

BUFFETT: They insured mortgages on a huge scale, trillions, and then they ran sort of ahedge fund, a carry trade where they bought mortgages and borrowed extensively against

them. And because they had really the backing of the United States government--and

everybody assumed they had the backing. I assumed it. And the truth is they do have the

backing of the United States government in terms of their debt, not in terms of their equity--

they were able to borrow without any normal restraints in terms of capital or margin

requirements or anything of the sort. They had a by-check from the federal government.

QUICK: Mm-hmm.

BUFFETT: And they also had an added problem in that they had a dual mission. The

government expected them to promote housing and the stockholders expected them to raise

the earnings substantially every year. And as the years went by, they emphasized the latter

more and more. They started talking about "steady Freddie," and Fannie Mae said, `We're

going to increase the earnings at 15 percent a year.' Any large financial institution that tells

you that sort of thing is giving you a line of baloney. I mean, they may do it for a while, but

when they can't do it with operations, they do it with accounting and they cheat. And that's

what happened at both those places on a huge, huge scale. And we have this--they're so

wound up with national housing policy, that they're a national problem and, with this dual

situation, you know, Lincoln said a house divided against itself, you know, must fall. And theyexisted half-slave, half-free for a long time, and then the motivations became in conflict, and

when they got on the 15 percent a year merry-go-round and said, you know, `We're going to

deliver earnings up every quarter, and we'll meet them to the penny,' when they can't do it

operationally, they do it with accounting.

QUICK: So what happens now? You mentioned that this is all tied up with the national

housing situation now. Are they two big to fail, and what does that mean?

BUFFETT: Yeah, they're too big to fail.

QUICK: Yeah.

BUFFETT: So that doesn't mean that the equity can't get wiped out, and it almost has in the

stock market, and in practical sense as institutions, they don't have any net worth. I mean, if




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you look at their obligations and look at the fact they have big deferred tax assets as assets.

They would've been gone in any market where the government wasn't behind them long, long

ago. But the government is behind them, and they will stay behind them, and people that owninsured mortgages or who own their debt, I think--nothing's going to happen to them. The

equity and the preferred stock is another question and I think you'll see some action fairly

soon. You've already seen it in the fact that the Treasury has made pretty much explicit what

was formerly implicit.

QUICK: Do you say that knowing anything? Do you know there's a behind-the-scenes plan?

BUFFETT: No. I don't know. No. They--I'm not getting called on it.

QUICK: OK. You're not getting called on this, but you do...(unintelligible).

BUFFETT: I'm not getting called on that specific aspect of it.

QUICK: All right. Now you're telling me we're warm.

BUFFETT: They're looking--they're looking for help, obviously.

QUICK: Right.

BUFFETT: And the scale of help needed is such that I don't think it can come from the private

sector.

QUICK: So there could have been a situation where you've been called in the past and you

passed on any involvement?

BUFFETT: Yes. They were looking for--they, obviously, had been looking for money. They say

that.

QUICK: Mm-hmm.

BUFFETT: And they were told to look for money and--but even the amount of money they

were told to look for would be inadequate. I mean, 5 1/2 billion at Freddie would be, you

know, that'd be like taking a spoonful out of the Atlantic to try and save the Titanic.




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QUICK: How much to you think they need?

BUFFETT: They need a lot. But to get back to the confidence that they had and all of that, ittakes far more now. I mean, an ounce of prevention really is worth a pound of cure.

QUICK: If you imagine where things will go with Fannie and Freddie, and you think about the

regulators, where were the regulators for what was happening, and can something like this be

prevented from happening again?

BUFFETT: Well, it's really an incredible case study in regulation because something called

OFHEO was set up in 1992 by Congress, and the sole job of OFHEO was to watch over Fannie

and Freddie, someone to watch over them. And they were there to evaluate the soundness

and the accounting and all of that. Two companies were all they had to regulate. OFHEO has

over 200 employees now. They have a budget now that's $65 million a year, and all they have

to do is look at two companies. I mean, you know, I look at more than two companies.

QUICK: Mm-hmm.

BUFFETT: And they sat there, made reports to the Congress, you can get them on the

Internet, every year. And, in fact, they reported to Sarbanes and Oxley every year. And they

went--wrote 100 page reports, and they said, `We've looked at these people and their

standards are fine and their directors are fine and everything was fine.' And then all of a

sudden you had two of the greatest accounting misstatements in history. You had all kinds of

management malfeasance, and it all came out. And, of course, the classic thing was that after

it all came out, OFHEO wrote a 350--340 page report examining what went wrong, and they

blamed the management, they blamed the directors, they blamed the audit committee. They

didn't have a word in there about themselves, and they're the ones that 200 people were

going to work every day with just two companies to think about. It just shows the problems of

regulation.

QUICK: That sounds like an argument against regulation, though. Is that what you're saying?

BUFFETT: It's an argument explaining--it's an argument that managing complex financial

institutions where the management wants to deceive you can be very, very difficult. Or even

when the management doesn't know what's going on, and--just take Bear Stearns. Bear

Stearns had--I read it, anyway--750,000 derivative contracts. Now, you know, I could clone




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Albert Einstein, you know, and--many, many times and have him work 12-hour days for me

and he would not be able to keep track of what's going on in an institution like that. It's--the

ones that are too big to fail may be too big to manage, in some cases. And they're particularlydifficult to manage if they're promising Wall Street and their investors that they're going to do

things that can't be done.

QUICK: You've come out and said derivatives are the weapons of financial mass destruction

before. But you use derivatives, too.

BUFFETT: That's right. I don't say they're evil, per se.

QUICK: Yeah.

BUFFETT: I just say that once the genie opened the bottle on those many years ago, that

their proliferation, their variation, their inability to be valued and their ability to allow

institutions to pile up leverage like the world has never seen can cause great systemic

problems. And that doesn't mean, you know--it's like gun powder or water. You can do

damage with a lot of things, but these have systemic--they pose systemic risks. And

incidentally, the government recognizes this. I mean, you've had a task force working on, you

know, what do we do to prevent these things from causing a real problems? But they have

caused problems so far. I don't think they're going to cause problems at Berkshire Hathaway.

I know every single derivative contract we have. Now, when we bought Gen Re, they had

23,000 plus contracts.

QUICK: Mm-hmm.

BUFFETT: There was no way in the world I can get my mind around that. I mean, if I--if I had

spent full time and had all kinds of assistants and everything, I never would've known what

was in those contracts. We had one contract that was due in 100 years, so that meant that for

100 years some guy at our place put a mark on it every day and some guy at another place

put a mark and they got their bonuses based on it. I mean, that is a system that is

guaranteed to cause trouble. And so I got out of the business. It took me four years under

benign market conditions, and we lost $400 some million in the process. So they are

dangerous things. The ones we put on may be dangerous things, too, but I do know every

contract, and I know what my gain-loss arrangement is and nobody else marks them. I mean,

I keep track of it.




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QUICK: You do it yourself on every one. OK. Warren, we have a lot more to talk about with

you this morning. We'd like to get to some of your holdings, more on the economy, but we

also are going to take a very quick pause right now for a quick break. When we come back,Carl's going to be joining us again from China and Carl, what's on your mind?

QUINTANILLA: Becky, if that's the A-block, I cannot wait to see the rest of the show. Wow.

What--that's great insight from Mr. Buffett from OFHEO to derivatives, you name it. We'll get

more from the world's most successful investor and an Olympic update as we head into closing

ceremony on Sunday night. Becky's in Omaha, I'm in Beijing. This very special edition of

SQUAWK BOX continues in just a moment.

(Commercial Break)

QUICK: All right, welcome back, everybody. You know, Warren, we know that you are a huge

sports fan. You're somebody who watches all sorts of things, and, of course, one of your major

holdings, Coca-Cola, so what better way to tie all this up than Coca-Cola, sports, you've got

one of the major sponsors of the Olympics here. Let's bring Carl back into this conversation

from Beijing. And appropriately, yeah, Warren is holding up his Coca-Cola just right now, Carl.

So, as always, he's got a cherry Coke by his side.

CARL QUINTANILLA, co-host: Cherry Coke, yes.

QUICK: Yeah, Cherry Coke by his side. And, Warren, we've been talking all things Olympics

the whole way through. What do you think about Coca-Cola and the major sponsorship that it

has with the Olympics?

BUFFETT: Well, it has a long, long history with the Olympics, and it--it's very important. I

mean, Coca-Cola wants to be associated with happiness around the world. Every major event

they want to be here. And it's important--with a brand, there's something in the mind about a

brand. I mean, you have something in your mind about Coca-Cola or--but you don't have

anything in your mind about RC Cola because they've never been, you know. So we want that-

-we want that brand to be associated with something like the Olympics where there's

happiness, where there's competition, where the nations are getting together. It's a venue we

could not skip.




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QUICK: There have been people in the past who have said, `Hey, these sponsorships get

more and more expensive.' There are guerilla ways that other companies can kind of make

their way in...

BUFFETT: Yeah.

QUICK: ...without paying. Is that an option for Coca-Cola down the road?

BUFFETT: No, I--Coca-Cola would never be going on a country road when the interstate's

available. And it's--we're not--we're not there to be around the edges, we're there to be front

and center.

QUICK: You know, Carl, we've been talking earlier in the week about what some of the

Chinese media had been reporting about Buffett, about Bill Gates. What have people been

saying?

QUINTANILLA: Well, I think--I think the Coke comments are interesting, Warren. We

interviewed the chief marketing officer from Coke here last week, and of all the Olympic

sponsors, right, the global sponsors, the GEs of the world, the Lenovos, in China the poll

numbers show that they associate the Olympics the most of all the sponsors with Coke. So the

marketing machine is obviously working. We did--we did talk earlier in the week back--maybe

it was last week--about Pangu Plaza, the big hotel and office park...

QUICK: Right.

QUINTANILLA: ...and shopping mall that's over my shoulder here. And The Times did that

story earlier in the week about whether or not Bill Gates had rented out a penthouse for a

year, and whether or not Warren was staying there. Any truth to that at all, Warren?

BUFFETT: No, I'd actually talked about going to the Olympics a little bit with Bill, but I'm the

kind of guy that has to have it explained to me on television what happened, you know, that I

just saw. So I enjoy it enormously watching it on television, and Bill was over there for aweek. Although the day or two before he went over he was playing at a bridge tournament in

Omaha and then he came back to Omaha almost directly from the Olympics after about a

week over there.




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QUICK: So that wasn't you? You weren't--you weren't the one they spotted walking around in

Beijing?

BUFFETT: No, that must be my double, George Clooney, actually that was spotted.

QUINTANILLA: Has--Warren, has the--have the games, in all seriousness, have the games

made you think any differently about this part of the world--the world, western China, growth

opportunities, the ability for American companies to operate effectively within a different

government structure?

BUFFETT: Yeah, well, I was over there almost a year ago--Becky was with me--and I was

blown away by what I saw. I'd been there--the time before that was 1995, and I really had

never seen a country change so much in a--in a 12 or so year period, and clearly, when you

think of the size of the country, to effect that sort of change. So I--no I've been a big believer

in China before the Olympics and certainly they've put on a marvelous show during the

Olympics. And--but I would have expected that. You get--you get a bunch of very, very bright

people who care enormously about putting on a wonderful event, they're going to get the job

done.

QUICK: What about Chinese stocks? Does--do those--does the stock market there interest

you? You've been looking around the globe?

BUFFETT: Yeah, you know, you still can't buy stocks within China except under special

circumstances.

QUICK: Right.

BUFFETT: But, yeah, I--we owned that PetroChina stock at one time. There's one other stock

over there that we actually made a bid on here not so long ago, and it wasn't accepted. But

it's a terrific--it's going to be a terrific area for business. So, under the right circumstances,

you could see us with a lot of money there.

QUICK: What was the stock that you made the bid on?

BUFFETT: Oh, surprise, surprise. I never thought you'd ask.




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QUINTANILLA: Nice, Beck.

BUFFETT: No, that--I have sort of a mind blank out after I learned...

QUICK: But it's not--it's not impossible to say that, yeah, you are continuing to look at stocks

and you would make a bid from time to time if you found something that interested you.

BUFFETT: We made--we made a half a billion dollar bid on something, right.

QUICK: You made a half a billion dollar bid?

BUFFETT: Dollar bid, right.

QUICK: OK, if you don't remember the--if you don't remember the stock, what was the

industry?

QUINTANILLA: Oh sure, now you tell us.

BUFFETT: Yeah, it's bigger than, yeah--you're good, but...

QUICK: But not that good. No dice on this one? All right, well, Carl...

BUFFETT: She thought she'd get me at 5 in the morning, folks, and I'd be punchy.

QUICK: Yes, and maybe you wouldn't quite be on the defensive just yet. But, Carl, we do

have about two and a half more hours where we can try and work on him and squeeze more

details out, so...

QUINTANILLA: Yeah, I've heard--I've heard that if you get enough cherry Cokes in him, he

will spill everything.

QUICK: We've got them lined up.

BUFFETT: It acts like truth serum, yeah. There's no question about that.

QUICK: Yeah, well we've got those cherry Cokes lined up, and we'll keep them coming. All

right, folks, coming up, we're going to go from Wall Street to Washington, as a new movie is




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out there creating some shock waves this morning. This movie is all about debt and why it

could be putting the future of our country at risk. We'll get to the men behind the film who'll

be joining us when SQUAWK BOX returns live from America's heartland.

(Commercial Break)

QUICK: Welcome back, everybody, to this very special edition of SQUAWK BOX. Yeah, you

hear the "Love Boat" music playing today. We are in Omaha where last night we got to watch

a new movie premier that came out. We're going to be talking about that more. But we

figured while we had Warren Buffett here and we're in this movie theater of sorts, Warren,

we'd ask you about the first time you ever took a date to a movie theater.

BUFFETT: It was in eighth grade right here in Omaha, and a friend of mine wanted

particularly to ask out one girl and he was afraid to go by himself, so he talked two others of

us to each asking a girl. And we picked these girls up sequentially to go to the streetcar, and

they lived miles apart. By the time we got to the streetcar they were all exhausted, and we

came downtown to the movie. We picked a movie called "The Cat Woman" with Simone Simon

and "The Mummy's Hand" with Lon Chaney. And we felt that the girls would get terrified and

jump onto our laps or something of the sort. And what happened is, instead, we got terrified,

and the boys jumped on each other's laps. The girls were very cool. We finally got them home,

and I don't think anybody ever when on another date for about two years after that.

QUICK: All right, so it cured you the first time out. We'll take it as that. You know, Warren,

we have a lot more to talk about with you today. That was a quick little fun one, but we also

want to start asking you about some of the holdings of Berkshire Hathaway and where you see

the economy going. We're going to get to all of that in just a few minutes.

(Commercial Break)

BECKY QUICK, co-anchor (Omaha, Nebraska): But we're in Omaha this morning, folks, for

the world premiere of a new documentary that's resonating with Americans from Wall Street

to Main Street. It is appropriately titled "I.O.U.S.A." Let's take a look.

(Clip from "I.O.U.S.A.")




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QUICK: The man you just heard is David Walker. He served as comptroller general, and he

plays a major part in this documentary. He's joining us this morning on set. And, Mr. Walker,

thank you for being here today.

DAVID WALKER (Former U.S. Comptroller General): Good to be with both of you this

morning.

QUICK: All right. Well, we were just listening to what you were talking about, a major

problem that you've laid out. How serious and drastic is this problem, in your view?

WALKER: Well, I--it talks about four deficits, the film does. The budget deficit, the savings

deficit, the balance of payment/trade and the leadership. I think they're all a problem. But the

biggest problem's the leadership deficit. We have too many people today focusing on short-

term issues, not enough trying to take on structural problems to try to help make sure that

our future is better than our past.

QUICK: Mm-hmm. Warren, you said at the beginning of the show you didn't necessarily agree

with everything, but you do agree with taking a longer term look at some major problems out

there.

WARREN BUFFETT: Absolutely. I admire what Dave's doing, that he--the future does not--

has not had much of a constituency in this country in recent years and, you know, it's because

the electoral cycle's shorter than the policy cycle on many issues, and it's hard to get worried

about what's going to happen 10 or 20 or 30 years out. And we're feeling the effects of that in

energy and, obviously, every fiscal decision you make today has an impact forever, really...

QUICK: Yeah.

BUFFETT: ...in the country. So I--like I say, I admire--I admire Dave and Pete Peterson in

terms of what they've done here.

QUICK: David, you've been looking at the budget and studying these things for about adecade and a half and being really aware of every single thing that happened as the nation's

chief auditor. When did you really get worried that things were headed down a terrible path?




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WALKER: You know, I came in as auditor general of the United States, or the comptroller

general, in 1988, and things were going pretty well. You know, we had tough budget controls

in place, the economy was doing pretty well, we were moving to surplus, we had surpluses forfour years in a row--although only one of them without the Social Security surplus. In 2002

the budget controls, the statutory ones that were in place that helped us take us from deficits

to surpluses expired, and Washington totally lost control. It was more spending, enhanced

entitlements, more tax cuts. Out of control.

QUICK: Is there a sense that right now--with American people facing some tougher times,

with an economy that's in crisis, is there a sense that this is a message that's starting to

resonate?

WALKER: Well, first, I've had the good fortune of being able to go to over half the states,

over 40 cities...

QUICK: Right.

WALKER: ...over the last two years talking directly to the American people with others about

this. They get it. The question is, do people in Washington get it? The risk is, is that, clearly,

as Warren said, there are things that need to be done today. We do have challenges today.

People are hurting today, and we need to do some things to deal with that. But we must also

deal with our structural, systemic problems and not exacerbate the long range by doing things

that might be good today but further mortgage our future.

QUICK: What--in short order, what would you like to see done if you had a wish list, maybe

three things that could get done right away?

WALKER: Well, for the presidential candidates, I'll give them two things.

QUICK: OK.

WALKER: Number one, publicly acknowledge that we're in a $53 trillion hole that gets deeper2 to 3 trillion a year even if we balance the budget--unfortunately, we're headed the wrong

way--and that they'll make addressing that a priority. And secondly, for them to endorse the

need for a capable, credible and bipartisan commission to make recommendations to the next

president and the next Congress for an up or down vote; things like budget controls, Social




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Security reform, round one of tax reform and round one of health care reform. That would be

a tremendous positive step.

QUICK: Warren, what do you think about that?

BUFFETT: Well, I think I--probably the second point I agree with more fully. I think that

you've had situations like the Greenspan commission on Social Security...

QUICK: Right.

BUFFETT: ...back in 1982. There are times--usually commissions are a waste of time. I mean,

you know, the report goes in a drawer someplace and--I mean, just think of the last six or

eight that you can recall and how much came out of them. But there are occasions and,

frankly, a time of recession would make the country more receptive. And you would need--you

would need people on them that, in effect, the president couldn't ignore after the report came

in. But there's--it makes perfectly good sense to have people that are smart, that care about

the future of the country sit down. There are things we can do to improve ourselves always,

and the time might be ripe for something like that.

QUICK: Mm-hmm. Dave ..

WALKER: You know, we've got to learn how to walk and chew gum in Washington. You know,

we need to be able to do more than one thing at a time. And that's why a commission is

particularly critical, because we need to make progress on reinstituting budget controls. Social

Security reform is easy. We can do that if we go about it the right way. Health care is the real

challenge. And we do need tax reform, too. So if we had the right kind of commission with an

up or down vote--and that's what's different from a number of the other recent commissions--

then we could make progress on multiple fronts, and that's what we need.

QUICK: Have you reached out to the two campaigns? I mean, you said you've been across

more than half the country. What about the two political candidates right now?

WALKER: Yes. I met with the top economic policy advisers of both of the campaigns--they

both happen to be friends of mine--to help them understand where we're coming from in the

foundation, what we believe is important. And I'm hopeful that the general election campaign




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will make fiscal responsibility and intergenerational equity a higher priority. But we'll wait and

see.

QUICK: OK. You say that you're hopeful that the campaign will push that. Does that mean

you didn't get a great reception from either one of these two when you sat down with them?

WALKER: Well, you know, that means most politicians like to gain votes rather than lose

votes, OK? And that's why I think it's unrealistic to expect that they're going to get to a great

level of specificity about, `Well, this is exactly what we're going to do to Social Security or

taxes or health care.' That's why this proposal acknowledging the problem, endorsing this type

of commission is the right way for both of them, because then they don't have to get into the

specifics but yet they then have an ability to take on the issues after they're president. And for

the sake of our country, our children and grandchildren, they need to.

QUICK: All right, Dave, we're going to talk more about the film later this morning. We'll also

be joined by Pete Peterson coming up. But thank you for getting up early with us to talk about

this right off the bat. And we'll get back to you just a little bit later this morning.

WALKER: Great.

QUICK: Again, we also have Warren Buffett who's with you this morning. We'll be talking

more about "I.O.U.S.A.," but also the state of the economy. We're going to talk about the

"Oracle of Omaha," where he's investing in the stock market right now--at least we'll try and

get that out of him. Some of his investments, his thoughts on the state of the banking system.

Stay tuned, this is a very special edition of SQUAWK BOX right here on CNBC.

(Commercial Break)

QUICK: All right, welcome back, everybody. As we mentioned a little earlier, the movie

"I.O.U.S.A." premiered across the country last night, and we got the chance to host a live

town hall in Omaha that was simulcast to theaters across the country last night. Our CNBC

team was on the ground at some of those theaters across the country. They got the chance tocatch up with crowds from the East Coast to the West Coast. And, Warren, a lot of them heard

you were going to be at this town hall meeting, and so we had our cameras ask some of those

people some questions that they wanted to pose to you. Are you ready?




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BUFFETT: I'm ready.

QUICK: All right. Let's get to some...

BUFFETT: Where's the popcorn?

QUICK: Oh, there--they didn't provide popcorn quite this early...

BUFFETT: All right.

QUICK: ...but we do have some questions that are coming up. Let's get to the first question

for Mr. Buffett.

Unidentified Man #1: Do you think there's a characteristic about American democracy that

leads to American debt?

QUICK: A characteristic about American democracy that leads to American debt. What do you

think?

BUFFETT: Well, there's nothing inappropriate about having debt in America. I mean,

Berkshire has debt, and it's helped us grow over time. And it's when debt gets out of control

that you worry. But the American democracy, it's always fun to spend a little more than you

take in, and that applies to individuals, it applies to governments. And in a $14 trillion

economy, having debt that's 60-odd percent of GDP is not inappropriate. It wasn't

inappropriate when we had 120 percent of GDP in debt after World War II, because we had to

fight a war.

QUICK: Although you can't expect to maintain deficits like that endlessly.

BUFFETT: Yeah, you can expect to maintain a deficit that's a given percentage of the GDP. I

mean, Berkshire can expect to have debt forever, and the larger we get in terms of our equity

and earning power, the more debt we can sustain. And I don't think our shareholders would

want us to operate--take on some rule where we're going to operate debt-free in the future.

So it's--what you worry about is when the debt starts spiraling out of control, when it goes up

year after year after year as a percentage of GDP, because eventually when that occurs

people--if you try to borrow money around the world in your own currency, the world will say




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no. That's what happened in South America in the past, it happened in the--in the Asian

arena. We are able to borrow money in dollars. The world trusts the dollar. If we tried to run

our debt up to 3- or 400 percent of GDP, nobody would want debt denominated in dollars.

QUICK: OK. Let's take another question. This one comes from Irvine, California.

Unidentified Man #2: Hey, Mr. Buffett, I would like to know what is going to happen with

Fannie Mae. Are they going under?

QUICK: That was, again, what would be the best investment to hedge against the upcoming

debt crisis?

BUFFETT: Yeah. Well, I would say I don't think there's going to be an upcoming debt crisis,

but if you believe that fiscal activities that the government will get out of control and that we

will get on a situation where the debt skyrockets, you will have, obviously, you'll have

inflation--significant inflation. No government likes to pay back its debt in dollars that are

equivalent to the kind they took in. The best thing you're going to have is develop your own

talent. I mean, if you're the best doctor in town, if you're the best teacher in town, if you're,

you know, the best salesman in town, you'll do well no matter what the currency does.

QUICK: Mm-hmm.

BUFFETT: I mean, you will get your share. So investing in yourself is always the best thing.

Now, second best thing is to own products or stocks that have products that don't require

much capital investment, because you don't want to be--have a lot of required capital

investment during inflation; where they have very little capital investment but they are sort of

a royalty on whatever the current price level is in the country. I mean, if you take--I don't

know what product you might buy regularly, but what--whatever you use for your hair or...

QUICK: (Unintelligible)

BUFFETT: You're not going to change that if the price level doubles.

QUICK: Right.




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BUFFETT: And if they don't have to build new plants or anything, they just ride along that

curve.

QUICK: OK. And very quickly, that Irvine, California, question, I think we heard the wrong

one. The Irvine question, another one he was just asking about was what's going to happen

with Fannie Mae? Are they going under?

BUFFETT: Well, in a sense they've gone under in that--in that they only are existing because

the federal government has said that they're going to back up their obligations, so that...

QUICK: Right.

BUFFETT: ...from a standpoint of an independent entity, it--it's--the game is over on that,

pretty much. And that does not mean the Fannie debt or the guarantee on Fannie mortgages

is bad. Fannie Mae's an important institution in the--in the United States. But they priced risk

wrong.

QUICK: Mm-hmm.

BUFFETT: They did some things in accounting that were bad, they tried to obtain goals that

couldn't be achieved, and in the--and they leveraged up to an extent that was kind of crazy

and certainly was crazy to do it with the assets that they were using the leverage for. So

essentially the equity got wiped out.

QUICK: OK. We're going to take a quick break right now, but folks, when we come back we're

going to talk about Warren and Bill's excellent adventure. We'll get the inside story of your

summer expedition with Bill Gates. You just went this week to look at the tar sands.

BUFFETT: True.

QUICK: All right. We're going to talk about all of that when we come up, and we'll be

checking in with questions from more viewers across the country, too.

(Commercial Break)




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Unidentified Man #3: I was very curious, in your recent 10-Q, that you had not purchased

any bank stocks, very surprised that you had not jumped on that in July. I was wondering how

low they have to go before you're interested.

Announcer: This is a special edition of SQUAWK BOX live from the Holland Performing Arts

Center in the heart of beautiful Omaha, Nebraska. Now, once again, here's Warren Buffett and

Becky Quick.

QUICK: Welcome back, everybody, to this special edition of SQUAWK BOX. We've been

talking all morning long with Warren Buffett of Omaha, Nebraska, since we're live in Omaha

today. And, Warren, we've covered a range of topics, but there has been an awful lot of

people who are interested in the trip you made this week. On Monday you headed up with Bill

Gates and you got to take a look at the tar sands. What happened?

BUFFETT: Well, what happened was Bill and I talked some months ago about just how

interesting the whole thing was from a geology standpoint and from the standpoint that that

represents one of the few big upcoming sources of more oil production in the world, or very

few. And we both thought we'd understand a little bit better if we went up and looked at it

than simply by reading about it. So on Monday six of us, Bill and a few other fellows--the

Kiewit company arranged it. They're--they've done a lot of construction up there. And we went

up to northern Alberta and we saw a very big mining-type project. There are two ways that

they recover oil from the tar sands. And then we went to this in situ project also, and we hadsome perfect people explain a lot about how it worked both from a economic standpoint and

from a physical standpoint.

QUICK: Uh-huh. And was this something that you came up with, that Bill came up with, your

friend, Walter Scott, from the Kiewit company? Who came up with the idea?

BUFFETT: Well, Walter Scott arranged it for us.

QUICK: Right.

BUFFETT: Walter's a whole lot smarter than I am about what goes on in mining and all of--

anything to do with the real world. I'm good with numbers. And so he arranged the trip for us.

But it was something that Bill and I cooked up by--a couple of months ago when we were

talking about the tar sands. We said why don't we go up and take a look? And so we found a




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date when six of us could do it. Walter arranged the trip. We had some wonderful people up

there in Alberta at both projects that explained how the things really work, the costs involved.

And they just couldn't have been more helpful.

QUICK: OK. So having seen that, there's already been a lot of people who've been

speculating that you must be interested in investing in this arena. Are you?

BUFFETT: No, no. I go to the movies, but I don't buy movie companies. I mean, I--I'm

always interested in understanding the math of things and understanding as much as I can

about all aspects of business. And what I learn today may be useful to me two years from

now. I mean, if I understand the tar stands today and oil prices change or whatever may

happen, I'm--I've got that filed away and I can--I can use it at some later date. And that's

really the wonderful thing about investments is your knowledge is cumulative. So if you learn

about coal or you learn about retailing or something, 40 years you--it's useful at some point.

QUICK: Wait, does that make you think that an investment in a tar sands company,

somebody who's making--taking advantage of that would not be worth it at $120 a barrel for

oil?

BUFFETT: Well, the biggest variable in whether it's a good investment is the price of oil. Now,

it's important to know how much they can get out and what their costs are going to be and

what the capital costs--all of that is important and that fits into it. But you still have to figure

out what your own feeling is about what oil's going to be selling for three years from now or

five years from now. Because you could be the world's greatest mining engineer, but if you

were wrong about the price of oil in a big way it would negate all that knowledge. So it--I can

tell you that if 100--if you had $120 oil from now till, you know, 50 years from now, that the

tar sands would be--would work out very well. But I don't know the answer to that. And I may

form an opinion at some point, and I've got it--I'm prepared to form that opinion now.

QUICK: But you are not actively looking right now to invest in any of these companies?

BUFFETT: Do I have a buy order this morning? The answer's no.

QUICK: OK. Warren, we have a lot more to get to with you this morning. When we return,

we're going to be speaking more with Warren Buffett. Again, this is a big day. We've still got

two hours left and we've still got two big stories coming up. Again, I'm here live with Warren




23/62

Buffett in Omaha. We're also going to be covering everything that's happening with the

Olympics. Carl is standing by live in Beijing. This is day 13 of the Olympics, coming to an end.

We'll have more SQUAWK in two minutes.

(Commercial Break)

CARL QUINTANILLA, co-anchor (Beijing): But first we're going to start with the man of the

hour, Beck--actually, he's the man of three hours--Warren Buffett with you in Omaha.

BECKY QUICK, co-anchor (Omaha, Nebraska): That's right, Carl. We are live in Omaha today

because last night there was a groundbreaking event in the world of finance and politics and it

took place right here. This was the world premiere of a documentary that's called "I.O.U.S.A."

This film takes a look at what it thinks are America's four key deficits and it explores into all

the risks of these deficits, what it means to the future of this country and its citizens. Now,

Warren, you were in the documentary last night right along with Robert Rubin, with Paul

Volcker and with Alan Greenspan. So let's take a quick look at a brief clip from the film last

night.

(Clip from "I.O.U.S.A.")

QUICK: OK. Again, that was a clip with Alan Greenspan from the movie last night. It

premiered on hundreds of movie screens across the country last night, including right here in

Omaha. After the debut, I got the chance to moderate a town hall meeting with the men who

were behind the movie, Blackstone's Pete Peterson and the former US Comptroller General

David Walker. This is a quick look from that. And Warren, we did have a big discussion last

night about what the big problems are and exactly where things are going at this moment. In

your--in your view, we just heard from Alan Greenspan, he said that you need to be looking at

what's happening down the road. What do you think about that?

WARREN BUFFETT (Berkshire Hathaway Chairman & CEO): Well, I think in any personal

activity, business activity or certainly governmental activity, you know, there should be--you

should be thinking plenty about what happens down the road. That's one of the jobs of

government is to think about what is going to be our energy situation if we don't change 20 or

30 years from now.

QUICK: Mm-hmm.




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BUFFETT: What's going to be the fiscal situation. And so unfortunately, you have a many--the

most important things in society, the policy cycle is longer than the electoral cycle.

QUICK: Mm-hmm.

BUFFETT: So it's very tough to elect people every two years and ask them to be thinking

about something 20 years down the road.

QUICK: OK. We're going to talking more about this film in just a little bit. David Walker will be

joining us again, Pete Peterson, to talk about some of these issues. We also, though, have you

here for a lot of things that are happening right now in the economy. And at the top of the last

hour you talked about where you think the economy is headed. You still think that the trouble

in the economy, it could get much deeper from here?

BUFFETT: Well, I think you're seeing the ripples go out from what's started as a crisis in

home lending and the fact that we had a--we had a housing boom fueled by a lot of lending by

people who didn't know what they were lending on. And that's caused enormous problems in

the financial markets as people have started looking at these instruments which they thought

were triple-A and they're finding out they're about triple-F and--but those problem--problems

have a way of spreading, and that caused the banks to start want--starting to want to start

deleveraging in a big way. And when banks start deleveraging, that has--sends ripples out. So

there's consequences to every pebble that's dropped in the ocean and we had a pretty big

pebble dropped in.

QUICK: Now, you--your view of the economy comes not only from your own holdings, all the

companies that you own outright--everything from GEICO to Dairy Queen to Gen Re to Acme

Brick Company, all the companies that you hold--but also the holdings that you have in other

big companies, correct?

BUFFETT: Right.

QUICK: What sort of insight does that give you?

BUFFETT: Well, it--obviously, I pay a lot of attention to what's happening. And we'll say at

American Express--and Ken Chenault talked about that here a month ago--but they are

experiencing credit deterioration and they're experiencing it sort of in all segments. So they're




25/62

seeing the rich customers slow down in payments, slow down in purchases. And American

Express can describe that rather than I, but I pay a lot of attention to that sort of thing. And

incidentally, it will get cured at some time in the future, but right now the situation is gettingworse and I would say I don't see any early end to that.

QUICK: We want to talk to you about...

BUFFETT: But I do see an end.

QUICK: You do see an end, but no early end. I mean, is that six months, is that 12 months, is

that 18 months?

BUFFETT: I don't know.

QUICK: Can you put a time?

BUFFETT: Yeah, I don't know the answer to that. All I know is that it's not--I don't think it's

going to be really soon. I think that--my candidate is Obama, so I think President Obama is

going to have plenty on his plate in January.

QUICK: OK. Let's talk about your most recent disclosures for some of your holdings. When we

saw the last numbers, your shares in Anheuser-Busch, a lot of people were surprised to see

that you had gotten out of those shares before a deal went through with InBev.

BUFFETT: That's right. I sold about 60 percent of them in the second quarter.

QUICK: Why?

BUFFETT: Well, I wasn't--it was an evaluation of whether I thought the deal would go through

and the desire to sell at least some of the shares. I mean, Anheuser-Busch did not want the

deal to go through and they hired investment bankers, very expensive. They spent $72 million

with two investment banking firms. And believe me, most of that was spent with the idea of

trying to keep InBev away. So who knew how it was going to come out? And InBev

persevered, they raised their price and on the remaining shares we'll do somewhat better;

although there's still a time factor and we've used the money for other things. But in

retrospect, I was wrong to decide to partially sell the holdings.




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QUICK: What...

BUFFETT: But that--that's not news. I'm often wrong.

QUICK: What price did you sell at? It did not say in the filings.

BUFFETT: Oh, I--we probably averaged around 61 or 2, something like that.

QUICK: OK, 61 or 62, you still had a third. Are you--do you still hold that position?

BUFFETT: Yeah. We--yeah. We hold the shares, yeah. You didn't ask me that last time, so

yeah.

QUICK: I know, I didn't. I had to circle back this time a lot. So you still have those shares.

One of the other things from that filing that Berkshire filed with the SEC noted that you

weren't talking at that point about what's going on with ConocoPhillips.

BUFFETT: That's right.

QUICK: OK. Well, we have you here right now. That means a lot of people are out there

assuming that you're either buying or selling shares of Conoco and...

BUFFETT: That's certainly correct.

QUICK: And if I was a betting man, would it be right to think that maybe you were selling and

taking profits based on where oil prices have gone?

BUFFETT: Well, if you were a betting man, you'd be betting.

QUICK: Oh, so you're not going to necessarily come out there on that. Let's talk about the

price of oil in general.

BUFFETT: Sure.

QUICK: Price of oil has gone rapidly higher in the last few days. Once again, about 120, still

down from where it was...




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BUFFETT: Mm-hmm.

QUICK: ...just a month ago. But 120, you think that that's a comfortable price for oil?

BUFFETT: It's very hard to tell, but what you do know is that the situation in respect to

supply and demand in oil has changed dramatically in the last five or six years from what has

existed ever since World War II. I mean, ever since World War II we've always had a

significant amount of producible capacity beyond the demand that existed. Now, maybe for

one reason or another it wasn't being produced. The Texas Railroad Commission used to--

which was kind of--kind of a domestic OPEC--used to shut down the wells in Texas because

there was so much producing capacity and they didn't want to knock down the price, which

was $3 a barrel then. So we've always had the situation post World War II where it's been a

lot more supply could come on than there was demand. In the last 10 years, the first five

years oil demand went up around four million barrels a day, and then in the next five years it

went up another eight million barrels a day. That's 12 million barrels a day. We did not bring

on, in the world, anything like that in terms of productive capacity. So at 86 million barrels a

day, which is the present demand, roughly...

QUICK: Mm-hmm.

BUFFETT: ...the world that has no real buffer stock in terms of the--you can't turn the tap on

and get 90 or 95. And that means that prices have been and will be quite volatile and

probably--well, they have been at a--certainly at a higher level. It is a different world in terms

of supply and demand on oil than existed five years ago.

QUICK: What's your thought as to what the nation needs to be doing right now? I know

you've spoken with Boone Pickens about his plan.

BUFFETT: Yeah. Well, Boone's on the right track. And then one way or another, you know,

we're using 20 million barrels or so a day of oil, we're using a quarter of the oil, roughly, in the

world. We and the world cannot certainly keep increasing our demand for oil. If we--if we

required another 10 million or 12 million barrels a day in the next 10 years, I'm not sure

where it would come from or at what price it would come from. We just don't have that. The

tar sands would actually--will increase some, but oil depletes, production of oil depletes.

QUICK: Hm.




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BUFFETT: And so one way or another, we're going to have to learn to use a lot less oil. And

my guess is we're using less oil right now in the United States because of price factors.

QUICK: Yes.

BUFFETT: But I'm not sure that the world demand is--maybe it's decreased a million barrels a

day or something like that, but that isn't going to do it over 10 years. We're going to have to

use less oil.

QUICK: OK, Warren, we're going to be checking in with you again after we come back. We'll

have more from Omaha, folks. But we're also going to be checking in with Carl. He's got

plenty more coming up in Beijing. Carl:

QUINTANILLA: Becky, if Warren breaks any more news we're going to have to just go off the

air here, our heads are going to explode for all he information that's coming from him.

(Commercial Break)

BUFFETT: (From town hall meeting) Every line in the tax code is important to some

constituency. I'm not sure every line in the Bible is, though. The--and actually, you know,

you've got thousands of lobbyists there protecting each line in the tax code and I'm--again,

I'm not sure about whether the Bible has an equal army of people in--on K Street.

QUICK: All right, that was Warren Buffett answering a question on taxes during our town hall

right here in Omaha last night. Again, this was a town hall that was celebrating and looking

into the opening of "I.O.U.S.A.," that's a new documentary that opened and premiered last

night in theaters across the country. That question that came was from someone who wrote in

asking why the tax code is longer than the Bible. Well, it's something we got to talk about with

plenty of our participants last night. In fact, we're joined right now by some of the other

participants in that conversation. Pete Peterson is here with us this morning. Also David

Walker and Bill Novelli, the CEO of the AARP. And gentlemen, thank you for being here once

again this morning on the same stage where we were last night. I'm guessing everybody isworking on adrenaline at this point, practically all-nighters for everybody involved. Pete, let's

start out with you. The movie last night, "I.O.U.S.A.," is something that the Peter G. Peter--

Peter G. Peterson Foundation did put some financial backing into. Why did you get interested

in it? What's important that you think in the message?




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PETE PETERSON (Peter G. Peterson Foundation): Well, Dave and I have concluded

unanimously, the two of us, that the country faces some long-term challenges that if we don't

address them are undeniable, at least in our opinion, unsustainable, and yet they're, politicallyspeaking, not touchable.

QUICK: Mm-hmm.

PETERSON: And our job, we think, in a democracy like ours is to use every means we can,

and this film is only part of a much broader program to educate the American public and to

activate them and motivate them to do something about it. And the doing something about it

is essentially to let our elected representatives know that this is serious and they want action.

At the present time they feel--that is, our representatives feel that if they confront some of

these long-term problems, since all of them involve somebody either giving up something or

paying more for something, that it will result--not only being politically incorrect, but politically

terminal.

QUICK: Mm-hmm.

PETERSON: And we've got to change that around so that they feel that if they don't do

anything, then they're going to be in re-election trouble.

QUICK: David Walker, we spoke with you earlier this morning. Again, David Walker who's the

former comptroller general of the United States. If you have to look and put your finger on

one issue that you think is the most pressing thing, what is it?

DAVID WALKER (Peter G. Peterson Foundation): Health care costs are totally out of control.

Health care costs represent 34 trillion, just Medicare alone, 34 trillion of our $53 trillion hole.

The United States is the only country on the face of the earth that's dumb enough not to have

a budget for health care. Every other country does. We need to engage in fundamental reform

of health care to achieve universal coverage for basic and essential health care, have a budget

for health care. We need universal practice standards, evidence-based practice standards, and

we need to enhance personal responsibility and accountability.

QUICK: All right. Bill, you represent the AARP, and some people have said in the past that

seniors get very concerned when you start taking away benefits or changing things that have

been set up. What are--what does your constituency think about the plan presented here?




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WILLI AM NOVELLI (AARP CEO): Well, we've done a tremendous amount of research among

our 40 million members and the rest of the public down to 18 years old, and we're pretty sure

that the public is ahead of the politicians. People do want change. The generations in thiscountry are very closely connected to each other and they have one thing in common, they

want this country to be strong for the future, for their children and their grandchildren. And so

what we have here is a big opportunity. This video that has been done here is a good kind of

wake-up call, and from an AARP standpoint we can do town hall meetings across the country,

thousands of them. So this is an opportunity to make change.

QUICK: Warren, you're not convinced that things are quite as dire.

BUFFETT: No, I--the short-term outlook is not. But we've had a number of recessions in this

country; in fact, we had a Great Depression, we had--we've got world wars. And throughout,

the genius of the American economy, our emphasis on a meritocracy and a market system

and a rule of law has enabled generation after generation to live better than their parents did.

And, I mean, most of the people in this room, practically all of them last night, lived better

than John D. Rockefeller lived. I mean, all kinds of things have happened. And in the 20th

century alone, the standard of living of the average American went up seven for one. There's

never been a period like it in history. And that's not an accident. It's because we unleash

human potential and will continue to do that in the future. And we'll always have challenges

and we'll always have disputes between different demographic groups and income groups. The

rich don't want to pay their share of the taxes. The poor probably, you know, they--in the last

20 years, the net worth of the Forbes 400 has gone from 220 billion to a trillion five hundred

and forty billion. So you'll always have fights within the family about who gets what of the pie,

but the pie will grow.

QUICK: But there are points that all four of you agree on. What's the closest point where, I

mean, you say, `Yes, this is something the American people need to hear?'

BUFFETT: Well, I think you should always be thinking about the future. I mean, I think you're

crazy if you're not--if you're not planning out where you'll be in 10 and 20 or 30 years. You'll

get surprises in those plans.

QUICK: Mm-hmm.




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BUFFETT: And frankly, American ingenuity will tend to surprise on the upside much of the

time. I also think that it's dangerous politically over time. It doesn't endanger the economy in

a huge way, but it's dangerous politically over time to run very large current account deficitswhereby there's a massive transfer of assets or IOUs to the rest of the world from America. I

think that will cause a lot of demagoguery and potentially some real problems 20 years down

the road. We'd still have a more prosperous society.

QUICK: Mm-hmm.

BUFFETT: But it wouldn't be--wouldn't be as good as if we didn't do it.

QUICK: David?

WALKER: I think we agree on two things. I believe all four of us do, based on listening last

night and talking this morning. Number one, we need to focus on the future.

QUICK: Hm.

WALKER: We're a great country, we need to do a number of things to make sure we stay

great. And secondly, we support a capable, credible and bipartisan commission to be able to

make recommendations to the next president and the next Congress to deal with some of

these challenges so we can start making a down payment on our big hole and try to increase

the likelihood that our future will be better than our past.

QUICK: You've had conversations with both campaigns, with the McCain and the Obama

campaigns. What's been your takeaway from those conversations?

WALKER: Well, the takeaway is there's a difference between getting elected and governing,

and there's a tendency for people not to want to talk with too much specificity with regard to

some of these challenges in order to get elected.

QUICK: Mm-hmm. Right.

WALKER: The challenge is this: If they don't at least acknowledge the problem and figure a--

figure a path for it, like a commission, then you don't have a mandate to be able to do

something after you're elected. And so that's why I think acknowledging the problem,




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endorsing a capable, credible and bipartisan commission is the right thing to do for them and

the right thing for the country.

QUICK: Mr. Peterson, you put some financing into this film. Would you consider doing a

debate with the two political candidates that focuses specifically on the economic issues out

there?

PETERSON: I'm just the aging founder of this. We have the CEO sitting here. We're exploring

all kinds of possibilities.

BUFFETT: The one thing you won't find, Becky, you won't--you won't find either candidate

telling you that if we're going to spend $3.1 trillion next year, the federal government will tell

you how they're going to raise 3.1 trillion. They just aren't going to come up with it. They...

QUICK: Long on promises, short on ways on how to do it right now.

WALKER: Maybe if you invited them, they'd come. But they would have some trepidation, I

think. And I think we'd find some ways to come up with some funding for it if it was

necessary.

QUICK: But...

PETERSON: The other big audience that we're going to focus on are the young people. And

I'm one of these old fogies that doesn't even do e-mail, so I'm hardly the person to plan it.

But we've got a bunch of young people who are experts looking at Facebook and MySpace and

MTV and so forth, because it's going to be very important to get these young people aware of

their future, incidentally, not mine. Buffett and I'll do pretty well, if we don't live...

BUFFETT: I hope so.

PETERSON: If we don't live too long.

BUFFETT: Yeah.




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QUICK: David, if you had, again, to take a look and go out to Congress, do you think this is a

message that plays back? You're in an election season, it's a tricky time. But what's been the

push back? What's been the...

WALKER: Well, I agree with what Bill Novelli said.

QUICK: Mm-hmm.

WALKER: I mean, the American people are ahead of the politicians.

QUICK: Hm.

WALKER: They're not accustomed to hearing the truth from the politicians and they're lookingfor two things. They want truth and they want leadership.

QUICK: Mm-hmm.

WALKER: And they need--we need more of both right now. So I think that if we can get the

American people engaged, involved, if we can get the presidential candidates to acknowledge

the problem, to be able to endorse the type of commission we're talking about as a way

forward, there's hope.

QUICK: OK.

NOVELLI: Becky, you got a question last night from a woman who said, `I'm a boomer and

I'm worried about my adult daughter.'

QUICK: Yeah. Mm-hmm.

NOVELLI: This is true all over the country. You know, the majority of adults in this country

think that their children are going to be worse off than they were. This would be the American

dream going backwards. We can't let this happen.

QUICK: All right, gentlemen, I want to thank you all for joining us this morning. It's a topic

we'll be discussing through this morning as well. But also coming up, this is something you've

never heard Warren Buffett talk about ever before. We're going to be back in two minutes. I'm

as intrigued as you are.




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BUFFETT: (Unintelligible)

QUICK: So is he, you should see his face. We're going to be spending the morning with theworld's most famous investor and we have much more SQUAWK right after this.

(Commercial Break)

BECKY QUICK, co-anchor (Omaha, Nebraska): Coming up, we will have much more from the

"Oracle of Omaha." He has lots of wisdom to share with all of us. In fact, just listen to this.

WARREN BUFFETT ON TAPE FROM LAST NIGHT: It has not paid to sell America short

since 1776, and the time to start is not 2008.

(Commercial Break)

QUICK: All right. Welcome back, everyone, to this special edition of SQUAWK BOX. We are

live in Omaha, Nebraska, and we are fortunate enough to be joined this morning with Warren

Buffett. He's got to be the world's most celebrated investor. Warren, we want to thank you for

joining us here this morning.

BUFFETT: I'm enjoying it.

QUICK: Well, we have a lot to talk about. If you take a look at what's been happening with

the Federal Reserve, with the challenges they've been facing, what kind of job, what kind of

ratings would you give the Federal Reserve up to this point?

BUFFETT: Well, I--I'm inclined to give anybody that takes on a tough job like that a pretty

good rating. I mean, they get the toughest problems of the world thrown at them. And in my

job, I wait for easy pitches. I mean, I--you know, somebody can say Microsoft at 27 or

General Motors at 10 and I don't have to swing. I--there's no called strike in my business. So I

wait--I could wait a year and get one pitch I like and swing. And so I wait for the easy ones.

And in the Federal Reserve position, you have to take on the toughest problems. There are no

obvious answers, there's trade-offs. And when I--when somebody that's very bright, very

public-spirited takes on the job, I'm disinclined to ever criticize.




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QUICK: Do you think the Federal Reserve has gotten inflation under control? Do you think

that they've focused a fair amount on the economy?

BUFFETT: No, they've got a tough problem. I mean, with these dual goals of essentially

stimulating growth and at the same time containing inflation, they're in direct conflict. And the

temptation is, since the lack of growth is apparent today and the inflation tends to kick in later

on, to ignore the inflation aspects. It's a very tough balancing act and it can't be done

perfectly. And like I say, I couldn't do it perfectly and I don't think anybody can, but I admire

the people that take on the job. I admire Bernanke, I admire Greenspan. That doesn't mean I

think they were always right. It's--I think they're thought to have more power than they really

do have. I mean, Ben Bernanke does not have any magic wand that's going to create--enable

people that have borrowed too much money on their homes or people who've lent unwisely or

the banks that are too leveraged, that doesn't go away easily.

QUICK: We talked earlier this morning about Fannie Mae and Freddie Mac and some of the

major problems facing those two institutions right now. In your opinion do these stocks, you

think, get wiped out?

BUFFETT: Well, there's certainly a reasonable chance of that because they wrote insurance at

the wrong price. And if you write insurance and write--we write insurance at the wrong price,

you know, we're going to go broke. I mean, it--when you write insurance, you make a

promise. In their case, they guaranteed the credit of trillions of dollars worth of mortgagesand they charged a service fee for doing it--an insurance premium you can call it--and they

got the wrong price for it. And then they--their other activity, which is to run a very large sort

of hedge fund with a carry, where they lend money long and they borrow money in various

ways, they had a spread on that. And that works fine as long as the spread's maintained and

they've done some things to protect that, but it doesn't do well if the assets crumble on them,

and they've had some crumbling. So they got into trouble the way people have historically got

into trouble both in terms of running a carry trade and both in--and in terms of writing

insurance at the wrong prices. And there is no easy cure. You can't tear up your old insurance

contracts. And they can--they keep existing because they've got the federal government

behind them. And the federal government should be behind them, excluding the equity

portion.

QUICK: You own shares of Fannie Mae, Berkshire Hathaway did, up until when, about 2001?




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BUFFETT: We were the largest shareholders of Freddie Mac in the--in the United States, and

around 2000 or 2001...

QUICK: Yeah.

BUFFETT: ...it became so apparent to me that they were intent on trying to report quarterly

gains to please Wall Street, and there are all--if you've got the government behind you and

you can borrow money in unlimited amounts, you can report earnings for any given quarter

that you want to. I mean, the chickens don't come home to roost till later. And the

management was intent on that. They started doing things on the asset side they shouldn't

have done, they made promises they shouldn't have made, and so we got out.

QUICK: All right. If--is there anything that would ever convince to you get back in, or would

these companies have to be completely recapitalized and reset up?

BUFFETT: It would--it would--it would take a much different situation.

QUICK: (Unintelligible)

BUFFETT: You need--if you run an institution with enormous leverage, you need somebody

with a fiduciary gene running it. And they had a peculiar problem in that they were trying to

serve two masters. And then Congress was telling them push the money out and foster

housing in every way you can, don't require as much in down payments, make--you know, all

kinds of things, take on projects that they wouldn't have taken on for an economic reason.

And Wall Street was saying deliver us 15 percent earnings gains every quarter. And they tried

to do both of those things, and in the end they're going to do neither.

QUICK: When you take a look at the United States and its stock market compared to what

you see overseas right now, where--what makes you most excited when...

BUFFETT: Well, I see values in all arenas. I mean, we try to look for the best ones, but

there's no magic to any given market and things are cheaper than they were a year ago inmarkets here and in markets around the world. So everything is more attractive, generally

speaking, both here and in Germany and the UK and Korea and you name it. And I just try to

look for the things I understand the best and that also are selling for less than I think they're

worth.




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QUICK: The dollar has gotten much stronger over the last month.

BUFFETT: Right.

QUICK: Is that a trend that you think can or will continue?

BUFFETT: Well, it won't continue if over the next five or 10 years we run very large current

account deficits. Now, exports have been doing well lately. I mean, the country is remarkably

innovative and resilient. I mean, we are going to export 12 percent of our GDP this year, and

in 1970 it was 5 percent.

QUICK: Mm-hmm.

BUFFETT: So people who think that America is not in the game are totally wrong. But we

have been importing like 17 percent of GDP. If we have that gap and it continues, the dollar

over time will get weaker. Not necessarily next week or next month or next year, but it will

get weaker over time. You can't run persistent, huge current account deficits for decades and

not have consequences.

QUICK: But you don't have any bets against the dollar right now.

BUFFETT: Not right now.

QUICK: You've taken them in the past. At the moment, nothing?

BUFFETT: That's right.

QUICK: You have any currency plays right now?

BUFFETT: None--no direct currency play. We own stocks in companies in other countries, but

no currency plays.

QUICK: OK, let's take a couple questions from people that we were listening from last night.

Again, we've been spending the morning with you, but last night we did have CNBC crews who

went out to some of the theaters across the country that were previewing "I.O.U.S.A." We got

a chance to catch up with some of the people there and ask them a few questions. Let's start

out with one question that's coming from Chicago.




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Unidentified Woman: Hi, Warren. Identifying the debt problem and coming up with a

solution seems like an easier task than motivating Congress. What would you suggest that we

do to help motivate a shortsighted Congress?

QUICK: OK. That's, again, going back to how do you motivate a shortsighted congress. What

would you suggest?

BUFFETT: It's very tough. I mean, in the end, can I name a politician in the last 20 years that

said, `My campaign is I'm going to increase your taxes a lot and come close to closing the

budget deficit.' And since nobody wants spending cut--they all want the other guy's spending

cut...

QUICK: Mm-hmm.

BUFFETT: ...and, you know, we'll have to increase taxes. I--Walter Mondale tried it in 1984

without much success. Now, what I do with politicians is I ask them what they believe in and

will work for that a majority of their constituents oppose. Now, if they give me an answer to

that, I know they really believe that. I mean, I don't get long answers to that question. But

what they...

QUICK: I bet you don't.

BUFFETT: Yeah, no. But that's the real test of what they believe in. Anybody's for anything

that gets them elected, so if they--if they say, `I'm for lowering your taxes,' or `I'm for

bringing all kinds of things to my district,' or earmarking things,' you know, of course they're

going to say that. And they'll say that whether they believe in it or not because it keeps their

jobs. Now, the question is what do they believe in that might endanger their job if in--if done?

QUICK: What did Barack Obama say when you asked him that question? You're supporting

him.

BUFFETT: Yeah. I'm not going to ask him that question.

QUICK: You haven't asked him that question.

BUFFETT: No, I didn't--I didn't--I didn't put that one to him.




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QUICK: Why not?

BUFFETT: I didn't feel like putting him on the spot that way.

QUICK: But he got your support anyways.

BUFFETT: Well, I have a choice of two candidates...

QUICK: Right.

BUFFETT: ...and I support Barack and I think that on balance he will be better for America.

Although I admire John McCain as an individual, but I think that Barack would be better. But I

will--I can tell you that both candidates are not addressing things in the campaign that areimportant issues, because they feel it'll cost them votes.

QUICK: What do you think is the most important issue that's not being addressed by either

campaign?

BUFFETT: Well, I think in the--certainly in the financial area. Now, they've both made certain

proposals on taxes, but in terms of the realism of what would happen in terms of closing

budget deficits or something of the sort, I don't think they really want to get that specific

about it now.

QUICK: OK. I think we're going to have more on this conversation--a little bit more about

what's happening in the election, what you think about the ideas of a windfall profits tax, and

we'll talk about all of those issues in just a little bit coming up. Meantime, though, we're going

to take a very quick break and let you catch your breath. You can have a sip of your Cherry

Coke. You, too. Anyway, folks, we'll be right back with much more from Warren Buffett on his

home turf right here in Omaha, Nebraska.

QUICK: Warren, you couldn't hear what Steve had just been talking about, but he did say

that one point coming out of Jackson Hole is that this rise we've seen again in the dollar--rise

that we've seen again in oil is clear evidence that the Fed does not have everything under

control when it comes to inflation. What do you think about that?



three hours with warren buffett - complete cnbc transcript - august 22, 2008

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